Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Sunstone Hotel Investors First Quarter 2023 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, May 5, 2023 at 12 p.m. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Qs, 10-Ks and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including adjusted EBITDAre, adjusted FFO and property level adjusted EBITDAre. We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Additional details on our first quarter results have been provided in our earnings release and supplemental which are available on our website. With us on the call today are Bryan Giglia, Chief Executive Officer; Robert Springer, President and Chief Investment Officer; and Chris Ostapovicz, Chief Operating Officer. Bryan will start us off with some highlights from our first quarter operations and recent trends. Afterwards, Robert will discuss our capital investment activity. And finally, I will provide a summary of our current liquidity position, recap our first quarter earnings results and provide some additional details on our outlook for the second quarter. After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Bryan. Please go ahead.

Thank you, Aaron, and good morning, everyone. We are pleased with our performance in the first quarter as we continued to deliver on our strategic priorities and achieved operating results that exceeded expectations, including profitability that was above the high end of our guidance ranges. Our portfolio performed well and grew occupancy 16 points from the prior year with average daily rates up nearly 3%. While the impact of the Omicron variant made for easier comps in January and February, we also saw meaningful occupancy growth in March and are pleased by what we are seeing into April, which continues to point towards sustained demand growth even as we move into cleaner year-over-year comparable periods. What is particularly encouraging is that demand growth continues to diversify away from just leisure travel and is composed of more business transient and group events. In fact, two of our top tghree highest occupancy hotels in the quarter were the Hilton San Diego Bayfront and Renaissance Orlando, both large convention hotels that were able to replace discounted transient demand with larger amounts of higher-rated corporate group business. The Renaissance Orlando set an all-time monthly revenue and profit record in March, demonstrating the strength of demand for group events and the success of the additional meeting space we added several years ago. Our hotels continue to command strong rates with total portfolio ADR of $314 in the first quarter, a 3% increase from last year and an 18% increase over 2019 on a comparable basis, which is the highest first quarter ADR the portfolio has ever achieved. Our urban and convention hotels continued to see the biggest gains and grew rates nearly 16% in the quarter as compared to the prior year. The Hyatt Regency San Francisco, once again, led the portfolio with rates up…

Thanks, Bryan. We are pleased with the progress we have made investing in our portfolio. Since we last spoke with you earlier in the year, we have completed the addition of the Olakino pool at Wailea Beach Resort. This new health and lifestyle focused experience has been well received by guests in the initial days since opening, and we expect it to enhance the overall guest experience and increase the appeal and value of the asset. As Bryan noted earlier, work is also progressing on the conversion of the Renaissance Washington, D.C. to the Westin brand. The project is expected to be completed in the fourth quarter and will contribute to year-over-year growth in the second half of 2023 as it is relaunched as a flagship Westin property. We are also converting our Renaissance and Long Beach to a Marriott, and that project will be kicking off later this year. We expect the investment to better enable the hotel to compete for business and grow earnings with the Marriott flag driving higher group rate and transient occupancy. The renovation will begin in the second quarter with the plan to relaunch in early 2024. At the Confidante Miami Beach, our renovation plans have now secured approval from the Historic Preservation Board and work will soon begin. We have been able to refine the plans and now expect to incur less displacement in 2023 than we previously expected. We look forward to sharing further updates on our progress as the transformation to the Andaz Miami Beach gets underway. As the year goes on, we will further realize the benefits of our recent investments and conversion activity and start to lay the groundwork for the next layer of growth in the portfolio. Recycling capital will continue to be a primary component of our strategy as we look to harvest gains and redeploy proceeds into new growth opportunities. The transaction market remains challenging given economic uncertainty and restrictive financing. That said, we maintain considerable balance sheet capacity, which allows us to be opportunistic and take advantage of dislocation. Additionally, we constantly look for ways to creatively grow and enhance the value of our portfolio, and we look forward to sharing further updates on our investment activity as the year progresses. With that, I’ll turn it over to Aaron. Please go ahead.

Thanks, Robert. As of the end of the first quarter, we had approximately $146 million of total cash and cash equivalents, including $49 million of restricted cash. We retained full capacity on our credit facility, which, together with cash on hand, equates to nearly $650 million of total liquidity. As Bryan mentioned earlier, we recently closed on a new $225 million unsecured term loan and expect to use the proceeds to fully repay the mortgage loans secured by our Hilton San Diego Bayfront. After this refinancing, our next debt maturity will not be until December 2024 and is only $72 million. The pricing structure and covenant package for this new term loan are identical to our other existing bank debt and the all-in cost of the new term loan is similar to that of the mortgage being repaid. Given the challenged lending environment, we are pleased to have completed this refinancing and appreciate the ongoing support and partnership from our lending group. As of the end of the first quarter, our pro forma net debt and preferred equity to EBITDA stood at only 3.7x, and our net debt to EBITDA was only 2.7x, giving us one of the strongest balance sheets in the sector. During the quarter, we took advantage of the volatility in the rate to swap $175 million of our floating rate debt to fixed rate. This will result in a decrease in near-term interest expense and bring the portion of our total debt and preferred that is fixed to 65% of total. Shifting to our financial results, the full details of which are provided in our earnings release and our supplemental. The quarterly profits, which surpassed our expectations and were above the high end of our guidance ranges reflect continued robust leisure travel with increased contribution from…

[Operator Instructions] Your first question comes from the line of Duane Pfennigwerth of Evercore ISI. Please go ahead.

Hey, thanks. Good morning. I wonder if you could just comment on the weather impact in the quarter and put some numbers to that displaced revenue or maybe cancellation revenue and then just – I know you said one, but just on the confidence, maybe you said it in the prepared remarks, but can you help us think about the magnitude of the less displacement revenue this year? Thanks.

Afternoon, Duane, so on the – for the weather, mainly California, up and down the coast, we did see some impact. When you look at San Diego, definitely on the leisure side, we saw some impact there, but the group – the group that we had on the books was so strong. And as we said in the prepared remarks, the pickup was higher than what we saw in pre-pandemic times. So that was able to backfill that demand. San Francisco, we saw the same thing. We saw a very strong group. We saw increasing business transient, we saw new business transient coming into the hotel as a result of the renovation and the better room product we had. So it was able to backfill there also. I think where we did see some impact, and we haven’t quantified it exactly, but in wine country, there was some – for the luxury leisure tourist when it’s raining, those shorter-term bookings do get impacted. The good news is that the first quarter is kind of – is the smallest and lowest quarter of the year there. Those two hotels, as we’ve said before, really start generating the majority of their earnings, they are actually the entirety of their earnings in Q2 and Q3, and our group pace is strong there. So we feel pretty good. So probably all in all, maybe a few million dollars of revenue at the most. But luckily, the way our convention hotels were able to outperform and backfill it really minimize that.

Thank you. Your next question comes from the line of Anthony Powell of Barclays Capital. Please go ahead.

Hi, good morning out there. Just question on San Francisco, you mean you did see a pretty big increase in the quarter. That said, there is been talk about convention room nights in the market declining next year. So maybe just a broad overview of your hotel there and how you see the market evolving?

Yes, afternoon, Anthony, it was a great quarter in San Francisco. We were able to really drive group business and in-house group business. We’re fortunate to have a good quantity of high-quality meeting space. We have newly renovated rooms. And so while a lot of the city-wise don’t fully get to our hotel, or we have other business in place, even the large ones, while there is some rate compression. We don’t participate in all of them. And so that’s something that we continue to build on and the success of this hotel will rely on in-house group. Pace and city-wise, for the rest of this year are actually pretty good, especially in the fourth quarter. Our in-house group pace is very strong. As we get into next year, we will have to continue to book that the self-contained groups. But that’s what the hotel is focused on, and that’s really between that and then the business transient that has been increasing, especially those companies located in the Embarcadero area. And what we’ve seen with the new renovation is that we’re able to get accounts that would not have stated the hotel before. So when we put that together, that’s the key to our continued success there.

Thank you. Your next question comes from the line of Smedes Rose of Citi. Please go ahead.

Hi, thanks. Bryan, just kind of interested in your thoughts about trends in Key West going forward. There has been, as expected, seen some sort of reset, I think, given some of the advantages those markets have during the pandemic. And I am just kind of wondering where you think that sort of settles out relative to kind of the ‘18, ‘19 level EBITDA versus what you saw in 2022 and 2021?

Thanks Smedes. Key West prior to the pandemic at Oceans Edge, we were embarking on a strategy change there where we were going to try to lower our occupancy, go after higher rates, really complete positioning the hotel as a luxury product. And so that was underway, obviously the pandemic kind of slowed things down. But coming out of the pandemic, we absolutely traded occupancy for rate and grew it substantially compared to 2019. As we expected and we talked about, the market has absolutely moderated this year. Other travel options, crews, options have – are also something that, that market competes against. Our view is that things will somewhat stabilize. Is it going to be at 2022 levels, no, no. That wasn’t our expectation. But we expect to continue to be able to grow that business and stabilize at rates and higher rates than ‘19, lower occupancy, better profitability.

Thank you. Your next question comes from the line of Chris Darling of Green Street. Please go ahead.

Thanks. Good morning.

Good morning.

Good morning. Bryan, can you touch on your expectations for RevPAR and EBITDA at Wailea through the remainder of the year, just given you will be lapping some tougher comps going forward?

Yes. Wailea had a great first quarter with really strong in-house crew. Our expectation for the rest of the year is that it will moderate somewhat, but we have good groups on the books and the market remains – it remains very strong. It remains a rate-integrity and the market has remained very, very high. So, that’s obviously a very good thing for us. We are still running that hotel at 10 points of occupancy lower than where we were pre-pandemic, but obviously, at much higher rates. Where that ultimately settles out is probably a little bit higher in the occupancy, but it’s not getting back to the 2019 levels. We are able to yield the hotel better. We are able to provide a better guest experience and better overall profitability. So, as we look out to the rest of the year, compare, looking back to comparing to 2022, we still expect single-digit growth there. And as our – we continue to upgrade the overall experience of the resort and the profitability, our new exclusive pool has just opened, and that’s going to be another area where we can drive overall experience and also profit.

Thank you. Your next question comes from the line of Charles Scholes Patrick Scholes of Truist Securities. Please go ahead.

Hi. How are you? Patrick Scholes here. Let’s go a little deeper into the results on the Four Seasons Resort in Napa Valley or I get it that 1Q is certainly a less important quarter, but RevPAR down 35%. What happened there? And I imagine maybe weather a little bit, but can you give more color there? Thank you.

Absolutely. And weather, as we said earlier, it was a factor. But those two hotels, when you look at the transient demand that was there in ‘22, Q1 and Q2 were still heavily elevated in most markets in wine country specifically. The hotels performed, the weather was a factor and performed not quietly in line with what we were expecting in the first quarter, but not that far off. Again, and I know that this will be much easier to see as we get the year completed and through our supplemental and other information we give you, you will be able to see much more at a granular level. But you will be able to see the quarterly seasonality of this market, which is heavily skewed to Qs two and three. And even this year Four Seasons is probably skewed more to Q3 than Q2. So, when we look at the makeup and we look at what group is we have on the books. At the Montage, pace is up significantly for the second half of the year, mainly Q2 and Q3, pretty evenly distributed. But we have $5 million of more group business than we had on the books in 2022. That’s – and we are talking at close to $1,000 rate with $600 a night of ancillary spend. At the Four Seasons, obviously, a smaller hotel, we have $2 million more than we had on the books in ‘22 at roughly $1,000 a night of ancillary spend, most of that coming in Q3 with some very high-rated corporate group business that will be very, very profitable for us. So, I know the comparison will get easier to understand as the year goes on. But the hotels are doing exactly what we expected them, minus a little bit of rain in the first quarter. And so our expectations for the year, we expect profitability to grow significantly, 50% to 70% more than what they did last year paces up very strong. And so our view on these assets is unchanged. We are very excited about what they will produce. And for you and our investors, you will start to be able to see that starting in Q2 and then in Q3.

Thank you. Your next question comes from the line of Michael Bellisario of Baird. Please go ahead.

Good morning everyone.

Good morning Michael.

Bryan, I want to go back to the comment you made about the transaction market being challenging. I just want to dig in there a little bit more. Is that on the buy side from what you are seeing? And then maybe more specifically on the sell side, what if anything has changed? And what have you learned so far there year-to-date on the sell side? Thanks.

Okay. So, I will start kind of maybe general and then Robert can give some more detail on specifics. Given where the debt markets are, where debt is available, but expensive relative to historic rates and not as plentiful as it once was. It does make transactions more challenging. It also makes larger transactions more challenging. So, sub-$100 million hotels as far as if a buyer and seller can come to an agreement, you can get financing, some form of financing for that. It obviously becomes more difficult as you get to larger deals where the debt may not be available or sufficient debt based on current rates and coverage levels required debt yields, or you are probably in the 50%-ish LTV range. And so while smaller deals are easier to get done as you get into the $200 million, $300 million, $500 million hotel range, it starts to become a little bit more challenging. Robert, do you want to talk.

Yes. I think that covered it well. I think we have seen a couple of larger deals that have been able to get done largely due to in-place financing that was assumable. Other than that, larger transactions have been definitely more challenged. And then probably no surprise on the buy side, it’s just a question of finding buyers and sellers that have a similar view as it relates to valuation, which often just relates to growth expectations from here. And in many cases, based on where hotels traded especially resort hotels, there was elevated expectations over the last several years. And so I think on the buy side, that’s really the primary issue that’s slowed down acquisitions is really finding sellers and where our expectations meet our expectations. But I think Bryan’s comments summed it up pretty good.

Thank you. There are no further questions at this time. I will turn the call over to Bryan Giglia. Please go ahead.

Thank you. And thank you everyone for your time today and interest. We look forward to meeting with many of you over the coming weeks at upcoming conferences and property tours. Thank you.

This concludes today’s conference call.